Are the Discounts in UK Open Offers and Placings Due to Inelastic Demand?

Armitage, Seth; Dionysiou, Dionysia; Gonzalez, Angelica

doi:10.2139/ssrn.2122508

Cited by 1 publication

(1 citation statement)

References 49 publications

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“…2 The offer price in pure placings is set before the announcement, becomes public at the announcement day and does not alter thereafter (similar to open offers). It is not clear why firms waive the traditional pre-emptive rights, however, placings have become a common SEO type in the UK since 2003 (see also Armitage, Dionysiou, and Gonzalez 2014). This paper provides new evidence about the long-run abnormal performance, earnings management and abnormal growth prospects of firms conducting pure placings.…”

Section: Introductionmentioning

confidence: 89%

Timing, earnings management and over-reaction around pure placings

Dionysiou¹

2014

The European Journal of Finance

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This paper provides new evidence about firms conducting pure placings in the UK. It examines their abnormal performance (stock and operating), earnings management (accrual and real activities) and abnormal growth prospects for up to three years surrounding the event. It questions whether (i) timing, (ii) earnings management and/or (iii) over-reaction hypotheses can explain these performance, earnings quality and growth paths. The results document that pure placing firms have high earnings quality and abnormally high growth opportunities at the announcement. For this reason, the market is overenthusiastic. It expects more than what is eventually fulfilled, in line with the over-reaction hypothesis. Weak evidence that placing firms may exploit market timing is noted, whilst there is no supportive evidence of earnings management. These findings distinguish the earnings quality and growth opportunities of pure placing firms from that of firms conducting open offers, firm commitment offers and other seasoned equity offerings (SEO) that are not private placements, for which prior evidence reports mainly timing and/or earnings management prior to the event. This paper facilitates a better understanding of UK SEO. argue that firms conducting placings are of higher quality than those conducting rights issues. These findings in relation to common features in the institutional settings between placings and open offers suggest similar implications for pure placings and open offers. However, relevant evidence is limited. Strong (2009a, 2009b) provide evidence that open offer firms underperform in the years following the announcement, mainly due to earnings management in the year prior to the event. Slovin, Sushka, and Lai (2000) characterise placings as similar to US bought deals, for which evidence also suggests post-offer long-run underperformance due to timing and/or earnings management in the year prior to the event (Loughran and Ritter 1997;Lee 1997;Teoh, Welch, and Wong 1998;Cohen and Zarowin 2010). 3 Post-SEO long-run underperformance is, in fact, in line with the Myers and Majluf (1984) miss-valuation problem. A firm will issue equity only if the new stock is relatively overvalued (SEO proceeds exceed the benefits of their use). If the market ignores this relative miss-valuation at the announcement, it will realise its mistake in the long-run. This leads to negative postoffer abnormal performance. It is also possible that the market under-or over-reacts to an SEO announcement. For example, the market reacts negatively to bought deal announcements whilst performance continues to deteriorate over the long-run. Hence, bought deals are associated not only with timing/earnings management, but also with market underreaction (Loughran and Ritter 1997). In contrast, the market appears to over-react to the announcement of a private placement due to high firm growth opportunities (Hertzel et al. 2002). Announcement reactions are positive, long-run post-offer abnormal returns (AR) turn negative and there is no evidence of ea...

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Section: Introductionmentioning

confidence: 89%